ex10_4.htm


    
      

    

    PARTICIPATION
AGREEMENT

    BY
AND AMONG

    UNITED
DEVELOPMENT FUNDING, L.P.,

    UNITED
DEVELOPMENT FUNDING II, L.P.,

    UNITED
DEVELOPMENT FUNDING III, L.P.,

    UNITED
DEVELOPMENT FUNDING LAND OPPORTUNITY FUND, L.P.,

    UNITED
DEVELOPMENT FUNDING IV AND

    UMTH
LAND DEVELOPMENT, L.P.

    


    This
Participation Agreement (the “Agreement”) is executed this 12th day
of November, 2009, by and among United Development Funding, L.P., a Delaware
limited partnership, (“UDF I”),  United Development Funding II, L.P.,
a Delaware limited partnership (“UDF II”), United Development Funding III, L.P.,
a Delaware limited partnership (“UDF III”), United Development Funding Land
Opportunity Fund, L.P., a Delaware limited partnership (“UDF LOF”), United
Development Funding IV, a Maryland real estate investment trust (“UDF IV,” and
together with UDF I, UDF II, UDF III and UDF LOF, the “UDF Funds”), and UMTH
Land Development, L.P., a Delaware limited partnership (“UMTH LD”).

    


    FACTUAL
BACKGROUND

    


    1.          
  The UDF Funds invest, or will invest, in the acquisition of land and
development of single-family lots, construction of single-family homes and model
homes, and the acquisition of model homes and finished lots utilizing a diverse
range of capital structures such as equity investments, joint venture
participations, mezzanine loans, subordinated loans and senior
loans.

    


    2.         
   The lifecycle of single-family lot development and home
construction generally begins with the acquisition of land for development of
single-family lots, followed by the entitlement and engineering of the subject
property, followed by the development of raw land into a finished lot, followed
by the construction and sale of a single-family home.  There are
differing levels of capital appreciation, cash flow, loan-to-value ratios,
development risk, market risk and investment yields over the course of the
development lifecycle.

    


    3.           
 Each of the UDF Funds invests, or will invest, in substantially similar
land development opportunities, although such investments may be made at
different points in the development lifecycle in accordance with the investment
criteria, yield requirements, cash flow expectations, investment horizon and
risk tolerances of the respective UDF Fund at the time the investment is
made.  In addition, the UDF Funds will determine to exit investments
in land development and home construction projects at different points in the
development lifecycle in accordance with the investment criteria, yield
requirements, cash flow expectations, investment horizon and risk tolerances of
the respective UDF Fund at the time the exit is made.

    


    4.           
 Subject to the respective limitations set forth in the organizational and
operational documents of each of the UDF Funds, investments may be entered into
as co-investments or joint ventures between two or more UDF Funds, and may be
sold to or refinanced by other UDF Funds in accordance with the investment
criteria, yield requirements, cash flow expectations, investment horizon and
risk tolerances of the respective UDF Funds.

    


    5.         
   UMTH LD is the asset manager of UDF I, UDF II, UDF LOF and UDF
IV and the general partner of UDF III.  In exercising its duties to
each of the UDF Funds, UMTH LD will manage each investment in accordance with
the investment criteria, yield requirements, cash flow expectations, investment
horizon and risk tolerances of the respective UDF Fund as each investment
progresses.

    


    
      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

    

    


    6.            
The UDF Funds each recognize that, in exercising its duties to each of them,
UMTH LD will encounter conflicts of interest.  Thus, each of the UDF
Funds and UMTH LD seeks to equitably apportion investment opportunities among
and between such entities in accordance with each fund’s investment criteria,
yield requirements, cash flow expectations, investment horizon and risk
tolerances at the time each transaction opportunity is presented by UMTH
LD.

    


    AGREEMENT

    


     NOW, THEREFORE, in
consideration of the covenants and agreements hereinafter set forth, the parties
hereto agree as follows:

    


    1.          
  In each case in which there is an opportunity to participate in a
transaction, including any investment, co-investment, joint venture,
participation, refinancing or sale, that qualifies for the investment criteria,
yield requirements, cash flow expectations, investment horizon and risk
tolerances of any two or more UDF Funds, which are described generally in Appendix A hereto,
the amount that each respective entity will invest in such transaction shall be
determined as follows:

    


    A.            First,
each UDF Fund which is presented the transaction opportunity will be allocated a
percentage of the transaction opportunity determined as the ratio of the total
amount of Equity Invested in such entity over the Total Combined Equity
Invested, such percentage being the “Investment Percentage.”  For
purposes of this Agreement, “Equity Invested” shall include both direct
investment and retained earnings as determined by the Most Recent Financial
Statements, and the “Most Recent Financial Statements” shall mean the most
recently available audited or unaudited financial statements prepared by the
respective entities with respect to the most recent calendar
quarter.  For purposes of this paragraph 1.A., “Total Combined Equity
Invested” shall mean the sum of the Equity Invested in each of the UDF Funds to
which the opportunity is presented.

    


    Each UDF
Fund which is presented the transaction opportunity will invest in such
transaction opportunity an amount equal to the Investment Percentage multiplied
by the amount of Required Cash.  For purposes of this Agreement,
“Required Cash” means the aggregate amount of cash required to be invested by
the respective UDF Funds in the transaction opportunity.

    
 

    B.            
Second, if, after allocating Available Cash (as defined in paragraph 1.D. below)
pursuant to paragraph 1.A. above, the full amount of the Required Cash has not
been invested, the remaining transaction opportunity shall be allocated amongst
and between the entities with remaining Available Cash as the ratio of the total
amount of Equity Invested in each such entity over the Total Combined Equity
Invested, such percentage being the “Remaining Investment
Percentage.”  For the purposes of this paragraph 1.B., “Total Combined
Equity Invested” shall mean the sum of the Equity Invested in each of the
entities with remaining Available Cash.

    


    Each such
UDF Fund will invest in the remaining transaction opportunity an amount equal to
the Remaining Investment Percentage multiplied by the amount of Required
Cash.

    


    C.            
Third, if, after allocating Available Cash pursuant to paragraphs 1.A. and 1.B.
above, the full amount of the Required Cash has not been invested, the remaining
transaction opportunity shall be allocated amongst and between the entities with
remaining Available Cash by repeating the process set forth in paragraph 1.B.
above until the full amount of Required Cash has been invested.

    


    
      
        
           


        

        
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    D.            
“Available Cash” shall mean all cash of the respective entity available for
investment, not including lines of credit or other borrowing facilities, as
determined by UMTH LD, taking into consideration the projected sources and uses
of cash for that respective entity.

    


    2.         
   In each case in which a transaction opportunity is presented
to a UDF Fund, the transaction opportunity shall be structured in compliance
with the investment limitations and requirements set forth in the applicable
organizational and operational documents of the respective UDF Fund and any
applicable prospectus or offering memorandum relating to the respective UDF
Fund.  Unless the organizational and operational documents of the
respective UDF Fund are more restrictive, the following terms
apply:

    


    A.           
No loan shall be sold between funds for an amount in excess of the outstanding
loan balance, including accrued interest, at the time of the
sale.  This does not prohibit the acquiring entity from subsequently
restructuring the loan in any way, including an increase in the loan amount;
and

    


    B.            
No asset shall be sold between funds for an amount in excess of its fair market value as determined by an
independent expert.  This does not prohibit the financing of
the investment by another UDF Fund.

    


    3.          
  Notwithstanding anything contained herein to the contrary, UMTH LD
shall exercise its best efforts to reasonably allocate transaction opportunities
amongst the UDF Funds as set forth herein, provided, however, that UMTH LD may
use approximations and rounding.  UMTH LD will rely on its Investment
Committee to apply each UDF Fund’s investment criteria, yield requirements, cash
flow expectations, investment horizon and risk tolerances to recommend an
investment, co-investment, joint venture, participation, refinancing or sale by
the respective UDF Funds.  Further, notwithstanding anything contained
herein to the contrary, UMTH LD and its agents cannot give assurance that they
will recommend investment in all transaction opportunities of which they become
aware that are suitable for one or more UDF Fund on an equal allocation amongst
such entities.

    


    4.            
This Agreement shall be governed and construed under the laws of the State of
Texas.

    


    
      
        
           


        

        
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    IN
WITNESS WHEREOF, the parties have executed this Agreement as of the date first
above written.

    


    
      	 
      	
              By:

            	
              UMTH
      Land Development, L.P.,

            
	 
      	 
      	
              a
      Delaware limited partnership

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
              By:

            	
              /s/ Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Name: 
      

            	
              Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Title:

            	
              Chief Executive Officer

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              By:

            	
              United
      Development Funding, L.P.,

            
	 
      	 
      	
              a
      Delaware limited partnership

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	
              United
      Development Funding, Inc.,

            
	 
      	 
      	 
      	
              its
      general partner

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
              By:

            	
              /s/ Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Name:

            	
              Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Title:

            	
              Chief Executive Officer

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              By:

            	
              United
      Development Funding II, L.P.,

            
	 
      	 
      	
              a
      Delaware limited partnership

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	
              United
      Development Funding II, Inc.,

            
	 
      	 
      	 
      	
              its
      general partner

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
              By:

            	
              /s/ Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Name:

            	
              Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Title:

            	
              Chief Executive Officer

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              By:

            	
              United
      Development Funding III, L.P.,

            
	 
      	 
      	
              a
      Delaware limited partnership

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	
              UMTH
      Land Development, L.P.,

            
	 
      	 
      	 
      	
              a
      Delaware limited partnership

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
              By:

            	
              /s/ Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Name:

            	
              Hollis M. Greenlaw

            
	 
      	 
      	 
      	
              Title:

            	
              Chief Executive
  Officer

            


    

    


    
      
        
           


        

        
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                By:

              	
                United
      Development Funding Land Opportunity Fund, L.P.,

              
	 
      	 
      	
                a
      Delaware limited partnership

              
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
                By:

              	
                UDF
      Land GenPar, L.P.,

              
	 
      	 
      	 
      	
                a
      Delaware limited partnership

              
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
                By:

              	
                /s/ Hollis M. Greenlaw

              
	 
      	 
      	 
      	
                Name:

              	
                Hollis M. Greenlaw

              
	 
      	 
      	 
      	
                Title:

              	
                Chief Executive Officer

              
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
                By:

              	
                United
      Development Funding IV

              
	 
      	 
      	
                a
      Maryland real estate investment trust

              
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
                By:

              	
                /s/ Hollis M. Greenlaw

              
	 
      	 
      	
                Name: 
      

              	
                Hollis M. Greenlaw

              
	 
      	 
      	
                Title:

              	
                Chief Executive
  Officer

              


      

    

     

    
      
        
           


        

        
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    APPENDIX
A

    


    


    Investment
Criteria, Yield Requirements, Cash Flow Expectations,

    Investment
Horizons and Risk Tolerances of the UDF Funds

    


    


    UDF I:

    


    UDF I
provides asset level and fund level leverage and generally seeks to invest in
land acquisition and development loans and participation agreements, provide
equity as an investment in entities that acquire and develop single-family
residential properties, and provide credit enhancements to developers and
entities in connection with third-party financing of land acquisition and
development loans.

    


    UDF I
generally seeks capital appreciation through value enhancement, higher yields
and internal rates of return and lower-to-more-moderate cash flow from loans and
equity investments with a mid- to long-term investment horizon and high risk
tolerances.

    


    UDF II:

    


    UDF II
provides asset level and fund level leverage and generally seeks to invest in
land acquisition and development loans and participation agreements, provide
equity as an investment in entities that acquire and develop single-family
residential properties, and provide credit enhancements to developers and
entities in connection with third-party financing of land acquisition and
development loans.

    


    UDF II
generally seeks capital appreciation through value enhancement, higher yields
and internal rates of return and lower-to-more-moderate cash flow from loans and
equity investments with a mid- to long-term investment horizon and high risk
tolerances.

    


    UDF III:

    


    UDF III
does not make equity investments and does not utilize permanent leverage and
generally seeks to (i) invest in secured real estate loans made to persons and
entities for the acquisition of parcels of real property to be developed as
single-family residential lots that will be marketed and sold to home builders,
(ii) secure such loans by a first lien or a second lien on real property or a
pledge of the borrowing entities’ ownership interest, and (iii) provide credit
enhancements to developers, homebuilders and other real estate entities in
connection with third-party financing of home construction loans and land
acquisition and development loans.

    


    UDF III
does not seek capital appreciation and generally seeks moderate yield and higher
cash flow from loans with a mid-term investment horizon and a moderate risk
tolerance.

    


    UDF LOF:

    


    UDF LOF
generally seeks to invest in and finance finished lots, paper lots and land to
be developed into residential lots and model and finished new home
inventory.

    


    UDF LOF
generally seeks capital appreciation, high yields and low-to-moderate cash flow
from loans and equity investments with a mid-to-long-term investment horizon and
a high risk tolerance.

    


    UDF IV:

    


    UDF IV
generally seeks to (i) invest in land acquisition and development loans,
finished lot loans, model and new home inventory, loans for the construction of
new homes and participation agreements, (ii) secure such loans by either a first
lien or a second lien on real property or a pledge of the borrowing entities’
ownership interest, (iii) invest in the equity of entities that acquire and
develop single-family residential properties, (iv) invest in discounted cash
flows secured by municipal assessments levied on real property and (v) provide
credit enhancements to developers and entities in connection with third-party
financing of land acquisition and development loans.

    


    UDF IV
generally seeks moderate yields and moderate-to-high cash flow from loans and
capital appreciation from equity investments with a mid-term investment horizon
and a low risk tolerance.

     

     

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